Rio Tinto puts projects under review

Rio Tinto
is reconsidering local coal and iron ore expansion projects because of the resource super profits tax, and has labelled the proposed regime its “No. 1 sovereign risk issue’’ around the world.

But while it added its name to the list of miners putting plans to invest capital in Australia under review, it believes the tax could improve the case for pressing ahead with its $US116 billion ($140 billion) Pilbara iron ore joint venture with
BHP Billiton
because of the need to find cost savings from operations.

Rio chief executive
Tom Albanese
said that since the tax was announced on May 2 he had asked the company’s Australian managers to review any capital investment proposals under a “worse-case tax ­scenario".

The reviews could see approval delayed for projects such as the $US1.1 billion extension of its Kestrel coking coalmine in Queensland and a 110 million tonne-a-year expansion of its Pilbara iron ore operations.

Despite the doubt cast over those developments, Mr Albanese gave a strong indication that the proposed tax changes would not stop the company from pursuing the iron ore joint venture.

In particular, he drew attention to the $US10 billion the deal was expected to add to the combined net present value of the companies’ iron ore businesses through synergies.

“The key benefit and attractiveness of the joint venture would be the synergies," he said. “If anything, with a net impost like this, it is more important to get those synergies and find areas for cost reduction."

Last week, BHP chief executive
Marius Kloppers
said that while the super profits tax had reduced the value of the joint venture, possibly giving cause to negotiate a lower equalisation payment as part of the deal, the gains were too great to worry about pushing for a lower payment, and he had discussed the matter with Mr Albanese.

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Because its iron ore operations in the Pilbara are smaller, BHP will pay $US5.8 billion to Rio to bring its stake in the joint venture to 50 per cent.

Yesterday, both Rio and BHP fuelled the debate about the effective tax rate paid by mining companies operating in Australia, claiming they were subject to a much higher rate than suggested by Treasurer
Wayne Swan
.

Mr Albanese said the figure Rio was paying was “in the mid-30 per cent range", while BHP said the average rate it had paid from financial year 2004 to financial year 2009 was 42 per cent.

Defending the proposed tax changes last week, Mr Swan claimed domestic mining companies paid only a 17 per cent effective rate of tax and multinational miners only 13 per cent on Australian income.

Rio also denied suggestions that if the tax had been in place 10 years ago, the Australian economy would be $35 billion better off.

“I don’t agree with that statement," Mr Albanese said. “I talked to my predecessor Leigh Clifford and other executives who were involved in the decisions in the Pilbara over the past 10 years and I can say with some certainty that if the tax had been in place then, we would not have made the investment that we did.

“We would not be producing today at 220 million tonnes [of iron ore] a year. It would be a smaller business and that would not be good for Australia." Rio started investing in the Pilbara in the mid-1960s. But it has only been in the past decade that it has started to see regular, strong returns from the business.

“Most of our assets are long depreciated. I don’t think it’s right that the government can take 40 per cent of their depreciated value going forward when the investors took that initial risk and suffered through several decades of poor returns," he said.

Mr Albanese and Rio Tinto Iron Ore chief executive
Sam Walsh
, who also addressed the media yesterday, warned it could be a long time before the tax matter was settled.

In the meantime, they said projects in other parts of the world that weren’t “draped in uncertainty" were more likely to be allocated capital.

Mr Walsh met with a number of foreign iron ore customers in Shanghai last week and said they were all “very concerned" about how the proposed tax would affect supply.

Rio’s annual general meeting will be held in Melbourne on Wednesday after it was adjourned earlier this week due to problems caused by the Iceland volcano.